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Brownout At Westinghouse

July 16, 1995

The Corporation: STRATEGIES

BROWNOUT AT WESTINGHOUSE

This has not been a good year to be Michael Jordan--either of them. The basketball star returned to his team amid great fanfare in March, but his hopes of turning the Chicago Bulls back into champions quickly died out. As for the other Michael Jordan, who took over as chief executive of Westinghouse Electric Corp. amid equally high turnaround hopes, spurring a comeback has been just as hard.

Michael H. Jordan arrived at the Pittsburgh conglomerate as one of the most prominent members of the "Class of '93," the group of outside turnaround specialists brought in by boards after shareholder revolts. Like Lou Gerstner at IBM, George Fisher at Eastman Kodak, or later Albert Dunlap at Scott Paper, he came to clean up a corporate mess. For two years, he has asked shareholders to be patient. If they gave him time to cut costs and fix Westinghouse's debt-laden balance sheet, Jordan promised, the core businesses would provide something investors haven't seen since the 1980s: dramatic growth.

But on June 28, a disappointed Jordan surprised Wall Street with news that a turnaround may be further away than he had thought. Citing falling orders in the company's core power-generation and nuclear businesses, Jordan announced that second-quarter earnings would fall 30% to 40% below 1994's $75 million. Worse, at 10 cents to 11 cents per share, earnings will be little more than half analysts' consensus projection of 19 cents.

UNDERWATER OPTIONS. Shareholders wasted no time reacting. In heavy trading, they pushed Westinghouse down 8%, to 141/2. A day later, perhaps buoyed by Jordan's assurances that yearend earnings would top last year's $128 million (before restructuring charges) by 20%, the stock stabilized. But while rivals such as Gerstner and Dunlap have roughly doubled their companies' stock since taking over, Westinghouse shares have dropped 11% from their peak after Jordan was named (chart).

Perhaps no one feels the pain more than Jordan: The millions in options he received in 1993 remain underwater. He staunchly defends his record--and complains that the comparison with other companies isn't fair. "They didn't have a bad bank," Jordan declares. "We did."

Certainly, that is true. Following the collapse of Westinghouse Credit Corp. in the early 1990s because of bad real estate loans, Westinghouse was buried under $6 billion of debt, just a step away from bankruptcy. To pay down the debt and keep from going under, Jordan's predecessor, Paul Lego, put a third of the $13 billion company on the block. Jordan continued to sell off chunks. And with the expected sale of $500 million real estate developer Westinghouse Communities Inc. in July, debt could reach a manageable $2.5 billion, or 35% of capital, by the end of this year.

Easing Westinghouse's debt burden isn't enough to calm restive shareholders, however. Jordan has won kudos from investors for his amiable yet straight-shooting style, which contrasts sharply with Lego's. But they want him to boost returns, possibly by selling off divisions that they no longer see as key--a move Jordan has so far persistently opposed. "We frankly have a greater sense of urgency than he's had," grumbles investor Robert A.G. Monk, a principal of LENS Inc., which holds $3 million in Westinghouse stock. Adds Dale M. Hanson, the former CEO of the California Public Employees Retirement System, who three years ago led the shareholder push to revamp Westinghouse management: "It's not a company I'm inclined to invest in. Clearly, the turnaround has not been as fast as a lot of people hoped."

LOWBALL BIDDING. With the disappointing second quarter, Jordan now faces mounting pressure to show better results. He may have to find a strategic partner for his $2.5 billion defense-electronics division or move more quickly to unload $567 million Knoll Group Inc. Jordan wanted to revive the money-losing furniture business before selling it off, but he may not have that luxury. And he could feel more pressure to speed cost-cutting across the company, where he has already cut 7,000 jobs.

Jordan's problem is that the best growth opportunities for the $8.9 billion conglomerate are in smaller divisions, such as broadcasting and the Thermo King Corp. refrigerated-transport unit. Although they're performing well, they cannot carry the entire company. At the same time, growth prospects for his big power divisions, which account for 45% of sales, are dim and distant--in such risky markets as China and Ukraine.

Westinghouse's culture is another worry. The 59-year-old former PepsiCo Inc. executive and McKinsey & Co. consultant admits that he has had a hard time igniting his hoped-for revolution, which would turn the company from an army of engineers into a hotbed of entrepreneurs. While he has sprinkled headquarters with new marketing and finance executives from Pepsi and McKinsey, so far they've made little impression on the old guard who still run the technology businesses. Hanson says the contrast with Fisher at Kodak is particularly sharp. "Fisher seems to have taken on the bureaucracy, Jordan has not," he says. Indeed, Jordan admits that some of his units, including power generation, are still groping for a vision of their place in the market.

To be sure, Jordan has put large pieces of a strategy in place. As he shops with new joint-venture partner CBS Inc. for radio and TV stations and expands Thermo King plants around the world, he is counting on double-digit growth to push both $870 million units over $1 billion in two years.

To build for the long term, Jordan went on trade missions with Commerce Secretary Ronald H. Brown and pushed for power contracts in Asia and nuclear-plant revamps in eastern Europe--both big-growth markets. Westinghouse shocked its rivals last summer when it won an agreement with Shanghai Electric & Engineering Corp. on a $100 million manufacturing joint venture to build steam turbines. Rivals such as General Electric Co. had written off Westinghouse's chances a few years back because of its poor financial health, but Westinghouse sealed the deal by agreeing to manufacture locally and transfer technology.

The deal, the largest joint venture in China's power industry, assures Westinghouse a sizable piece of the country's gigawatt-starved market. And inside the company, the Shanghai deal was viewed as a triumph over GE. Westinghouse's steam turbines are ideally suited to China's coal-powered economy, leaving GE more oriented toward gas power, struggling for a foothold in the China market.

Even so, rivals say that Westinghouse may be setting itself up for future earnings problems. With the U.S. market stagnant and Europe protected, margins are shriveling in Asia as all the players--Asea Brown Boveri, GE, Mitsubishi, Siemens, Westinghouse, and others--fall over one another to sell equipment. Westinghouse has signed more deals this year than anybody, and rivals claim that in its desperation to find growth, it's offering some of the best bargains. Says one competitor in Hong Kong: "We've been astonished at the prices Westinghouse has been offering and don't know how they can succeed." Jordan argues that if Westinghouse can work its way into growth markets--even if it takes lowball bids--earnings will come later. "I keep telling people, you can't deposit margins in the bank," he says.

Jordan's other big hope for long-term growth is the $1.23 billion nuclear division. Although sales have ebbed in recent years, Jordan believes they can be revived with new plant sales in Asia and revamps of reactors in eastern Europe.

Eastern Europe is probably his best shot. There, Westinghouse hopes to perform something akin to a "brain transplant" on a generation of Soviet-built nukes by installing the latest process-control equipment as well as new safety systems. Two years ago, Westinghouse fended off Siemens to win a $400 million contract for its first upgrade, the Temelin plant in the Czech Republic. As in China, Westinghouse won the contract by moving technology to the host country and pricing low. A cheap financing deal from the Export-Import Bank cinched the deal.

With 44 plants throughout eastern Europe in need of upgrades and fuel, the potential is enormous. But most customers require financing, which is in short supply. Even with its balance sheet improving, Westinghouse is having to explore barter deals. And it continues to fight powerful Siemens for business in eastern Europe. What's more, the Russians are battling to win back former customers. They've disseminated reports that Westinghouse lacks proper technical information to work on the plants--a charge Westinghouse labels absurd.

"RING-KNOCKER" HAVEN. The other big hope for the division is the AP600, Westinghouse's latest-generation nuclear power plant. Jordan is aiming to sell the plants in China for $800 million apiece. But first, he must persuade the U.S. government to lift the export controls on nuclear technology that were imposed following the Tiananmen Square massacre of 1989. If that doesn't happen, he hopes to sell one elsewhere in Asia, perhaps in Indonesia. He argues that once an AP600 is working in Asia--performing more cheaply and safely than the current reactors--Americans might again start ordering nuclear plants. But even Jordan won't hazard a guess as to when.

To spur the growth he needs, Jordan knows he will have to do a better job of creating a market-driven culture. The division is dominated by what insiders call "ring-knockers." These are veterans who worked in Westinghouse's program to help the Navy develop nuclear ships. All received commemorative rings for their service. Victims of the layoffs at the nuclear unit complain that in the old-boy network, ring-knockers survive. "They get rid of marketing people and keep the engineers," claims a former employee. Westinghouse denies the charge, and Jordan claims that the culture is changing. Still, until he infuses a sense of entrepreneurial urgency into the unit, the Bulls' shot at a championship looks more promising than this Jordan's chances for a strong turnaround.By Stephen Baker in Pittsburgh